Domestic competition benefits could amount to £3bn

The financial benefits from opening the residential retail water market to competition could be worth almost £3 billion over 30 years.

Ofwat has today (19 September) released the final findings from its cost-benefit review of competition in the domestic market. It had been requested by the government to do so.

The report suggested the benefits could be worth as much as £2.9 billion over 30 years, which amounts to £8 per customer per year. This is a slight increase on its predicted savings of £2.3 billion (£6 per customer) laid out in its emerging findings in July.

In its assessment, the regulator outlined four potential scenarios which could arise following the opening of the household retail market. Higher costs, little innovation and weak competitive activity set out in scenario four would result in a negative net present value of -£1.4 billion (£3 per customer per year).

IMAGE: four scenarios of domestic competition

Source: Ofwat

The regulator said although the reductions in bills will be small in the short term, the market could “end the final retail monopoly”, and lead to innovation, improved customer service, and new offers. These offers include bundling of products such as energy and telecoms with water.

Customer research suggests that 56 per cent think having choice would be a good thing. However, the average saving they expect on their water bills if competition is introduced is 25 per cent, an amount Ofwat says is “unlikely to be available”.

Ofwat has now submitted its final assessment to the government. It is for the government to decide whether in principle it wants to introduce competition and, if so, how and when to do so.

Retail revolution

Chief executive Cathryn Ross said: “We are living in an age of retail revolution, but water customers are being left behind. The service offers from water companies can feel behind the curve compared to the innovation customers benefit from when buying other goods.

“The uncomfortable truth is that, when it comes to retail offers, water companies provide an analogue service in a digital age. Customers tell us they think they should have the freedom to choose and don’t understand why water is the only retail market in which there isn’t some form of competition.

“But, of course, this isn’t a one-way street.  There are significant costs to be considered, and it will be important to ensure that customers are treated fairly in a competitive market and that vulnerable customers are protected. The decision for the government to make is whether the potential benefits outweigh the costs and risks.”

Water UK responded to the report with caution, saying water companies remain “intensely focused” on delivering continued improvements and are “working hard” to prepare for next April’s start of retail competition for 1.2 million business customers in England.

“Extending retail competition to over 20 million households could secure potential benefits for domestic customers, but would also be a major undertaking and so deserves to be given very careful consideration.

“We look forward to a timely decision from government which helps sustain the stability the industry needs to continue successfully meeting the needs of its customers.”